A flag with the logo of Mercuria commodity trading house is pictured in Geneva, Switzerland, October 11, 2016. REUTERS/Denis Balibouse

LONDON (Reuters) - Trading in the North Sea crude oil physical market has seen a boost from a growing number of participants, but trader Mercuria warned on Thursday that more financial players meant derivatives could have an unduly large impact on the setting of the dated Brent benchmark price.

Dated Brent, which governs around two-thirds of the world’s oil trades, is set using prices of physical barrels of four streams of North Sea crude, Brent itself, Forties, Ekofisk and Oseberg (BFOE) and a series of derivative rates.

Kurt Chapman, head of crude trading at Mercuria, a major player in both the physical and “paper” North Sea markets, said he welcomed the additional liquidity and vibrancy that a broader spectrum of market participants brought to the market, but said increased “financialisation” was not without consequence.

“The liquidity is appreciated, but we need to make sure we retain the robustness of the process,” he said.

The pool of market players in the North Sea ranges from oil producers such as BP (BP.L), Shell (RDSa.L) or Total (TOTF.PA), to traders such as Mercuria itself or Trafigura, as well as a range of more pure financial traders.

Market participants bid and offer cargoes of 600,000 barrels each traded on a platform run by pricing agency S&P Global Platts, known as “the window”, and the lowest-priced crude will then set the daily price of dated Brent.

Mercuria is one of the world’s largest traders of physical commodities. The company, which is based in Switzerland, traded 2.1 million barrels of oil equivalent per day in 2016.

This compares with 7 million bpd of crude and products traded by rival Vitol last year.

To manage price risk, traders use swaps such as contracts for difference (CFDs) to hedge cargoes, but not all participants in the North Sea derivatives market buy and sell physical barrels.

”Right now if you look at the Brent benchmark, in the window, there are physical bid and offers on the screen, fine, it’s still a physical BFOE product,“ he said, adding that some derivatives eventually resulted in physical delivery,” Chapman said during a panel discussion at the annual S&P Global Platts Crude Conference.

“The link between the two, the dated (price) and the BFOE (paper market) is actually a financial product, which are CFDs that are traded on the screen, more actively almost, by financial funds, ‘curve shapers’, or ‘strippers’, as we call them, who are trying to arbitrage opportunities between other financial products and they are setting a very significant portion of what ultimately becomes the dated Brent quotation.”

The North Sea market, which is essentially backed by just 1 million barrels per day of supply, can be volatile and at times, just a handful of players will control a proportionally large number of barrels that they may need to service their own refineries or provide to customers, which in turn can create a temporary liquidity vacuum.

Financial players in the CFD market can accumulate large speculative positions that are never intended to result in physical delivery, but can have a knock-on effect on the price of a barrel of oil.